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“Risk appetite” refers to the amount of investment risk you’re comfortable taking for a particular investment goal. It’s usually based on the timeframe for that goal and on your personality and personal preferences.
For example, if you’re investing for the college education of a child who is still a toddler, you will likely have a greater risk appetite and be able to invest in more aggressive strategies because of the long timeframe until that money will be needed. You can afford to invest in stocks that fluctuate more — but are also likely to grow more — because you have years to wait out market ups and downs.
But if you’re investing for the education of a child who’s 16 years old, your risk appetite would likely be much smaller; in a few short years, that money will be needed for tuition payments. You can’t risk investing in stocks that are susceptible to volatility in case markets are low when you need to sell and withdraw cash.
When it comes to retirement investing, risk appetite generally tends to be higher for investors who have a long time horizon before retirement, and lower for investors who hope to retire sooner and need their investments to be more stable when they begin to rely on that money for income.
Personality and personal comfort play a big role in risk appetite as well. If you’re investing for a long-term goal but market volatility is still keeping you up at night, you may be investing outside of your risk comfort zone. There’s no “right” level of risk tolerance, just one that’s right for you.
Curious what your risk appetite is? You can take this short quiz to learn your “risk number.”
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